"The aura of the 'American exceptionalism' is fading! U.S. stocks and the U.S. dollar are falling out of favor."

As the aura of the "American exceptionalism" gradually fades, the U.S. stock market is falling behind globally. Just a few weeks ago, investors were cheering as Trump returned to the White House, betting that his tax and tariff policies would stimulate economic growth and boost the U.S. stocks and dollar, this is what is known as the "Trump trade." But now, this optimism has quickly deteriorated, due to the on-again, off-again trade wars, the massive government downsizing under Musk's leadership, and a series of data showing economic weakness. Investors are now shifting their focus from U.S. stocks to other markets. Germany's announcement last week of a significant increase in spending was seen as a major change in European policy-making, boosting stock markets, currency markets, and government bond yields in the Eurozone. Additionally, the emergence of the Chinese artificial intelligence startup DeepSeek has raised questions about the U.S.' dominance in the technology field. Overall, the halo of U.S. economic and market exceptionalism that has dominated for over a decade seems to be faltering. The once unstoppable S&P 500 index experienced its worst week relative to other global stock markets last week, within less than a month of reaching a historic high. The share of U.S. stocks in the global stock market value has also fallen from its peak of over 50% earlier this year. So far this year, the so-called "seven giants of U.S. stocks" have collectively fallen by 11%. As a result, U.S. stocks are lagging behind Chinese and European stocks. Disappointing performances from key U.S. companies have dampened investors' enthusiasm for some of last year's "big winners." Daniel Skelly, head of market research and strategy at Morgan Stanley Wealth Management, stated that these factors are unlikely to permanently dethrone the U.S. from its position as the largest and strongest stock market globally, but he believes that there is still room for the current shift to continue in the next 6 to 12 months. Meanwhile, after experiencing its best quarter since 2016, the U.S. dollar is starting to weaken. The dollar index has dropped nearly 4% from its peak in January, reaching its lowest level since November 2019, with most of the decline occurring last week and increasing bearish sentiments toward the dollar. The movement of the euro is an important factor driving the dollar's weakness. The euro rose nearly 5% last week, marking its best single-week performance since 2009. Analysts from Deutsche Bank and J.P. Morgan stated that deep and lasting fiscal stimulus by the European Union could further boost the euro. The derivative markets reflected significant fluctuations in market sentiment. The demand for hedging against a rising dollar is shrinking, and options traders' bullish bets on the euro are nearing their highest level in over four years. Furthermore, as investors bet that a softening outlook for the U.S. economy would require the Fed to cut rates to provide more support, U.S. bond yields have significantly declined. On the other hand, expectations that Germany will loosen its "debt brakes" leading to a significant increase in government borrowing have caused German government bond yields to rise sharply. This has suddenly narrowed the long-term yield spread between the U.S. and Germany to its lowest level since 2023, potentially weakening the relative attractiveness of U.S. Treasury bonds. Given the uncertainty surrounding the economic growth and inflation outlook in Europe, investors are still questioning whether German bond yields can sustain a sharp increase. However, at present, this highlights the divergent paths of the two markets. For international investors, assessing whether to invest in U.S. bonds also requires considering volatility. Monica Defend, head of the Amundi Investment Institute, stated that holding long-term U.S. bonds "is typically a safe haven," but "now it's a tactical trade, as U.S. bonds are too volatile." In her view, gold and the Japanese yen provide better safe havens for investors. Peter Tchir, head of macro strategy at Academy Securities, stated, "This is the first time there's a compelling reason to invest outside the U.S. market. In the past, there wasn't much consideration when capital flowed into the U.S., but this situation may be reversing, or at least changing." Most importantly, the U.S. economy has shifted from being seemingly unshakable to being a source of concern. The U.S. non-farm payroll data released last Friday was mixed, but in a report to clients after the release of the February data, J.P. Morgan economists stated that they believed "the probability of an economic recession this year is 40% due to the extreme policies of the U.S. government." U.S. Treasury Secretary Yellen also warned that as the U.S. government shifts the basis of economic growth to the private sector, there will be a "detox period." Although market sentiment may change rapidly - after all, the S&P 500 index took only about three weeks to return to its historic high after being hit by the impact of DeepSeek at the end of January this year - as long as investors continue to deal with policy strikes from the White House and uncertainty surrounding U.S. tech dominance, they have more and more reasons to turn their focus to markets outside the U.S. Troy Gayeski, chief market strategist at FS Investments, stated, "The concept of American exceptionalism will continue, but will definitely be significantly impacted."